Ah, the holy grail of biotech: positive cash flow. Elan (NYSE:ELN) isn't there yet, but it's getting closer, with revenue and expenses headed in the right direction.

The company thinks it'll have positive EBITDA (earnings before interest, taxes, depreciation, and amortization) by the end of the fourth quarter, but, as Fools know, EBITDA isn't cash flow. I'll be more impressed when the company isn't burning through cash and can begin paying down its nearly $1.8 billion in long-term debt.

Elan's revenue for the third quarter was up 53% year over year, but that wasn't a big surprise because Biogen Idec (NASDAQ:BIIB) had already announced sales of Tysabri, the jointly sold multiple sclerosis drug. More importantly, Elan's expenses -- specifically selling, general, and administrative ones -- dropped year over year. The company is doing more with less, and that's exactly what investors should see.

Research and development expenses increased substantially as the company pushes its Alzheimer's disease treatment bapineuzumab through phase 3 clinical trials. There are four ongoing clinical trials to test bapineuxumab -- two run by Elan and two by its partner Wyeth (NYSE:WYE). Wyeth has been having some problems getting people enrolled for at least one of its trials, but Elan says that its trials should be fully enrolled around the end of the year. With an 18-month treatment window, that means results would come out in the latter half of 2010.

Some of the huge drop in Elan's stock price over the past couple of months was overdue. Investors were putting too high a value on bapineuzumab, even though it's unproven -- witness failures by Myriad Genetics (NASDAQ:MYGN) and Pfizer (NYSE:PFE). And the patient growth for Tysabri had already begun to slow before the additional cases of progressive multifocal leukoencephalopathy (PML) were reported.

But, with a market cap hovering above $3 billion and the company on the verge of becoming profitable, Elan seems bizarrely cheap right now. Investors with the guts to buy now may very well see returns only rivaled by the returns that Elan provided in the two to three years after Tysabri was pulled from the market in 2005.

Pfizer is both an Income Investor and an Inside Value selection. Biogen Idec is a Stock Advisor pick. The Fool owns shares of Pfizer. Try any of our Foolish newsletters today, free for 30 days

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.